The IMF Warns of Shocks to Global Growth

“Sharply higher interest rates around the world could combine with weaker growth in emerging markets to slice as much as 2 percentage points off global growth in the next five years, the International Monetary Fund said on Tuesday.

In a report assessing how individual national policies could interact to undermine the world economy, the IMF also warned the conflict between Russia and Ukraine could reverberate to the rest of the region if sanctions against Russia escalate, hitting natural gas supplies to Europe and weakening European banks.

The resulting impact could prompt further gyrations in financial markets, in contrast to the recent period of market calm, the IMF said in its “spillovers” report.

In its worst-case scenario, the IMF said the United States and United Kingdom could tighten monetary policy sooner than expected, leading to higher borrowing costs worldwide, even as key emerging market growth slows a further 0.5 percentage point over the next three years.

The two developments would reinforce each other, prompting slower growth and hurting in particular those emerging markets with large economic imbalances, such as Argentina, Brazil, Russia and Turkey.

As in past reports, the IMF said monetary tightening in rich nations would have limited negative impact on the rest of the world if it was well-communicated and prompted by better growth prospects. The impact could also be muted if higher U.S. and UK rates come as the euro zone and Japan continue monetary easing, though this “asynchronous” tightening could cause more global exchange rate volatility….”